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Prepare a 2 0 2 6 trial balance.Bedrock Quarries Ltd . ( Bedrock ) , wholly owned by Betty Rubble, has operated a sand and
Prepare a trial balance.Bedrock Quarries LtdBedrock wholly owned by Betty Rubble, has operated a sand and gravel pit since During that time, its revenues have increased moderately. On March after almost two years of negotiation, a purchase and sale agreement between Flintstone Sand and Gravel LtdFlintstone and Betty Rubble was completed whereby Ms Rubble sold Bedrock to Flintstone. Mr Flintstone, sole shareholder of Flintstone, was optimistic about the synergistic benefits that would accrue to the combined operations.
Exhibit I Extracts from financial statements for Bedrock Quarries Ltdin $s
tableBalance sheet as at January tableunauditedtableunauditedtableauditedAssetsCash and cash equivalents,table$ S tableAccounts receivable,InventorytableLand at costPlant and equipment at costtableAccumulated depreciation anddepletiontableInvestment in and advances toassociated companytable$$$Liabilities and shareholder's equir,,,Bank indebtedness,$ S Accounts payable,theta Longterm debt,table You have reviewed the working paper files of HLC and have held discussions with Mr
Flintstone. All significant issues arising from your investigation, including your discussions,
are outlined in Exhibits II and III Key points from the purchase and sale agreement are
summarized in Exhibit IV
Exhibit II Notes from review of HLC working papers for the fiscal years to
Based on your review of HLCs working papers, you have learned the following:
Materiality for the engagements was set at of revenue for each year.
No review of subsequent events was conducted for any fiscal year.
A letter of representation was obtained from management in each fiscal year stating
that no contingencies or commitments existed, that no unusual transactions had
occurred, and that the financial statements were complete. Also, specific items
mentioned include the following:
Relatedparty transactions did exist.
Inventory was counted, costed and valued fairly.
In each year, one HLC staff member attended the yearend inventory count to
observe the procedures employed by Bedrock staff for the physical count and
valuation of inventory. Every year, accounts receivable were reviewed for
mathematical accuracy.
Harrison's fees for each year were based on of sales or $ whichever was
less, and the fees could not exceed a quotation from any accounting firm of similar
size and expertise.
Accounts receivable include amounts owed to Bedrock by Rubble Sales and Haulage
Ltd a company owned by Ms Rubble. The bank loan is secured by an assignment of accounts receivable and land and
equipment.
The accounting policies of Bedrock include the following:
Inventory is valued at net realizable value.
Revenue is recognized when products are ready for delivery.
Depreciation and depletion are calculated on a year straightline basis.
Exhibit III Notes from discussions with Mr Flintstone
From discussions with Mr Flintstone, you have learned the following:
Mr Flintstone initially heard of Bedrock's financial results and financial position
from a friend of Mr Harrison who had periodically discussed Bedrock's operations
with Mr Harrison.
Mr Flintstone relied upon the Bedrock financial statements for the years to
before entering into the purchase and sale agreement.
Mr Flintstone claims that during a meeting on August HLC assured him
that the financial statements of Bedrock were free of any material errors for each of
the fiscal years to
Mr Flintstone reviewed the draft financial statements prior to closing the deal.
Mr Flintstone had no knowledge of the nature and extent of HLCs procedures for
Mr Flintstone considers himself very knowledgeable about the industry.
Exhibit IV Summary of key points concerning the purchase and sale agreement
The purchase price of Bedrock's shares is $ million plus three times net income:
for the fiscal years and
HLC will remain Bedrock's accountants for fiscal after which the auditors of
Flintstone Sand and Gravel will assume the engagement.
Ms Rubble provided a general representation and warranty in the purchase and sale
agreement that all financial statements of Bedrock are true and correct.
Flintstone Sand and Gravel is entitled to have access to all of Bedrock's corporate
records in the course of its due diligence procedures.
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